HEALTH ECONOMICS

Health Econ. 19: 503–517 (2010)

Published online 27 April 2009 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/hec.1492

SOCIAL HEALTH INSURANCE REEXAMINED

ADAM WAGSTAFF
Development Research Group, The World Bank, Washington, DC, USA

SUMMARY
Social health insurance (SHI) is enjoying something of a revival in parts of the developing world. Many countries
that have in the past relied largely on tax finance (and out-of-pocket payments) have introduced SHI, or are
thinking about doing so. And countries with SHI already in place are making vigorous efforts to extend coverage to
the informal sector. Ironically, this revival is occurring at a time when the traditional SHI countries in Europe have
either already reduced payroll financing in favor of general revenues, or are in the process of doing so. This paper
examines how SHI fares in health-care delivery, revenue collection, covering the formal sector, and its impacts on
the labor market. It argues that SHI does not necessarily deliver good quality care at a low cost, partly because of
poor regulation of SHI purchasers. It suggests that the costs of collecting revenues can be substantial, even in the
formal sector where non-enrollment and evasion are commonplace, and that while SHI can cover the formal sector
and the poor relatively easily, it fares badly in terms of covering the non-poor informal sector workers until the
economy has reached a high level of economic development. The paper also argues that SHI can have negative
labor market effects. Copyright r 2009 John Wiley & Sons, Ltd.

Received 1 April 2008; Accepted 14 March 2009

KEY WORDS: social health insurance; health financing

1. INTRODUCTION
Social health insurance (SHI) – a model of health financing where a person’s entitlements to health care
derive from earnings-related contributions – is enjoying something of a revival in parts of the
developing world.1 Many countries that have relied largely on general revenues (and out-of-pocket
payments) to finance their health systems have introduced SHI, or are thinking about doing so.2 And
countries that have a fledgling SHI scheme in place are redoubling their efforts to expand its reach,
especially to the informal sector.3 Ironically, this revival is occurring at a time when three of the oldest
SHI countries – France, Germany and the Netherlands – are all in the process of reducing their reliance
on payroll contributions in favor of a broader financing base.4 This seems an opportune moment, then,
to reexamine the merits of SHI as a health financing mechanism.

*Correspondence to: World Bank, 1818 H Street NW, Washington, DC 20433, USA. E-mail: awagstaff@worldbank.org
1
Two recent conferences – both hosted in part by GTZ (a German technical agency linked to but independent of Germany’s aid
agency) – focused on SHI in developing and transition economies, one in Berlin in November 2005, the other in Manila in
October 2006. Details are to be found at http://www.shi-conference.de/and http://www.shiconferencemanila.info/.
2
Examples include Vietnam (1993), Nigeria (1997), Tanzania (2001) and Ghana (2005). Discussions are underway in South Africa,
Zimbabwe, Cambodia and Laos. Malaysia also recently began debating a shift to SHI.
3
Examples include Colombia, Mexico, the Philippines and Vietnam.
4
France widened the tax base from earnings to include non-wage income. Germany as discussed below is contemplating reducing
the emphasis on the payroll, while The Netherlands in 2005 introduced a reform where insurers receive only half their income
from payroll revenues (albeit channeled through a central fund), the rest coming from flat-rate direct contributions from members
(with offsetting income supplements for low income groups) (Gottret and Schieber, 2006; International Network on Health Policy
& Reform, 2006). In addition, to these changes, it is worth noting that Iceland and Spain both shifted wholesale from SHI to tax-
finance in the late 1980s.

Copyright r 2009 John Wiley & Sons, Ltd.

504 A. WAGSTAFF

The choice between SHI and tax finance can influence a health system’s ability to achieve the
overriding goal of any health system: to deliver health care to those who need it. The choice can affect
the collection of revenues (including the amount of revenues collected), the way revenues are pooled
across different groups, the type of health services ‘purchased’ and the way they are paid for, and the
way health service providers are organized. But the choice between SHI and tax finance also has
implications for a government’s ability to meet non-health objectives, such as economic growth,
employment and the distribution of income. This paper argues that the claims made for SHI’s ability to
meet health objectives are often overstated, and its drawbacks vis-à-vis non-health objectives often
understated.

2. WHAT IS SHI AND WHO USES IT?

The principal feature of a SHI system is that it is financed primarily through mandatory earnings-
related contributions levied on formal-sector workers. Traditionally, coverage is linked to contribu-
tions, not in the sense that people with higher contributions are entitled to more medical care, but rather
in the sense that non-contributors may have different entitlements to contributors, or people
contributing to different schemes may have different entitlements from one another. Beyond the basic
principle of mandatory earnings-related contributions for formal-sector workers, SHI countries vary,
notably in: (a) the arrangements made for people not employed in the formal sector (the Philippines and
Vietnam allow them to contribute to the formal-sector scheme, China and Mexico have a separate
voluntary contributory scheme for people outside the formal sector, Colombia requires those with
sufficient means to contribute to the formal-sector scheme, the Philippines and Vietnam use tax
revenues to enroll those with insufficient means in the SHI scheme, many Latin American countries
have separate arrangements for those not in the SHI scheme, etc.); and (b) the differences in
entitlements between those covered by SHI and those not covered by SHI (many Latin American
countries have separate delivery systems for the two groups, while most other countries have the same
system but levy higher copayments on those outside the scheme). Tax-financed systems by contrast use
general revenues to finance a common level of cover to the entire population, with a single delivery
system for everyone.
Figure 1 shows the shares of total health spending financed through SHI contributions and general
revenues in the 179 countries for which data are available. The closer a country is to the upper diagonal,
the less is the share of health spending financed privately (whether through private insurance or out-of-
pocket payments). Countries above the dotted diagonal finance 50% of the total health spending
publicly. Those at the bottom right-hand corner are the ‘pure’ SHI countries. They are almost all
industrialized (the exception is Costa Rica), reflecting the fact that SHI requires a mix of an extensive
formal sector and a highly developed personal income tax system for the self-employed. They include
the European countries operating the classic Bismarkian SHI model, but also Japan. Countries at the
top left-hand corner, by contrast, rely largely on general revenues. These are a mix of industrialized
countries and developing countries. Many are members of the (British) Commonwealth and operate
health systems similar to the UK’s National Health Service. However, the group also includes the
Scandinavian countries, Spain (which shifted from SHI in 1978), and Portugal and some of its former
colonies, notably Mozambique (also a Commonwealth member since 1995).5 The near-dominance of
general revenue financing in these countries reflects a policy decision not just to favor tax finance but
also to limit out-of-pocket payments; private health insurance by design or accident is also limited in
these countries.

5
Brazil (which abandoned SHI in, 1988) almost belongs to this group but currently finances less than 50% of total health spending
publicly.

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Figure 1. SHI vs taxes in health financing, 2003. Source: WHO World Health Report 2007

Countries above the dotted diagonal line but in neither of the two corners finance the bulk of their
spending through a mix of SHI and general revenues. Often these are countries that aspire to a pure SHI
system but have large sections of the population that are outside the formal sector, and the decision has
been made to cover all or some of them through general revenues rather than require contributions
(more on this below). In some cases, the country’s location in the middle area of the chart reflects the
fact that it has moved away from a contributory SHI system to a universal coverage system, but it has
left payroll taxes in place; Finland and Iceland are examples.
Many countries below the dotted line aspire to a SHI system, but currently the majority of health
spending is financed privately, due to either a limited fraction of the population being covered by the
SHI scheme or a limited depth of coverage of the SHI scheme. Argentina, Mexico, Guatemala and
Uruguay all enroll their formal sector workers in the SHI scheme, and cover others via a tax-financed
program operated by the Ministry of Health. Vietnam’s SHI program covers nearly 50% of the
population, albeit with taxes financing the contributions of the poor and other target groups, but
coverage is so shallow that it covers around 10% of total health spending. Many countries below the
dotted line appear to have no SHI aspirations – there is a lot of clustering on the y-axis – and some have
made a firm policy choice in favor of general revenues, Brazil being the prime example.

3. REVENUE COLLECTION – IMPLICATIONS FOR HEALTH AND NON-HEALTH POLICY

OBJECTIVES
SHI and tax finance are first and foremost different ways of collecting revenues. The former is, in effect,
a payroll tax, with employers and employees typically being legally responsible for a part of the
payment. By contrast, tax-financed health systems draw their revenues from all taxes, including in some
countries payroll taxes that are not earmarked for specific uses, and non-tax revenues as well. The
choice between the two is likely to have implications for non-health objectives, but may ultimately

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impact on health objectives too, because the choice may affect the resources available to the health
system.

3.1. Raising revenues

Advocates for SHI often rest their case on the argument that tax revenues are typically insufficient to
finance enough health care at a quality level that meets the expectations of the population. SHI, it is
argued, offers the prospect of larger revenues for systems considering a complete switch to SHI, or
supplementary revenues for those moving toward a mixed financing system where additional tax
revenues for some reason cannot be raised. One reason it is thought SHI may be an easier route to
raising revenues is that people’s willingness to make SHI contributions is likely to be higher than their
willingness to pay taxes: they can link their contribution to an entitlement; and they may be willing to
contribute more in respect of others if they are asked to display ‘solidarity’ with fellow workers in a
specific industry or in a specific area of the country than if they are asked to display solidarity with the
population at large. Some SHI advocates also see SHI as a way to get round what they see as the
inherent unpredictability of tax finance: tax revenues, it is argued, rise and fall in line with the economy,
and the health ministry’s share of tax revenues is vulnerable to negotiations within the government.
The evidence on these points is not altogether compelling. The immediate ‘tax base’ for SHI is clearly
smaller than the tax base of the economy as a whole, being confined to the earnings of those in formal
sector. If the aim is to cover the entire population through SHI contributions levied on formal-sector
workers, the contribution rate in countries where large fractions of the population are not formal-sector
workers will end up being very high, or SHI will end up covering a relatively small share of total health
spending. In Germany, workers’ contributions – currently 16% of earnings (Busse and Riesberg, 2004)
– also pay for cover for the unemployed, the number of which has been rising recently. In Estonia, the
SHI fund is financed largely through earnings-related contributions levied on just half of the
population; contributions are just 14% of earnings, but out-of-pocket spending has been growing
quickly as a share of total health spending (Couffinhal and Habicht, 2005). Nor is it necessarily the case
that when SHI contributions are introduced the resources raised are additional to the tax revenues. In
Kazakhstan, for example, the finance ministry reduced the allocation of tax revenues to the health
sector as SHI contributions were introduced, regarding them as a substitute for tax revenues not a
complement (Langenbrunner et al., 2008). Worse still, the finance ministry may, as in Kazakhstan,
reduce the tax revenues it allocates to health in line with theoretical SHI contributions, which due to
evasion may differ considerably from actually revenues (more on this below).
The argument also assumes that tax revenues and the share of them allocated to the health sector are
a fixture. In reality, both reflect policy choices as well as the design of the tax system and the efficiency
with which it works. A recent World Bank report (Baeza and Packard, 2006) lists a number of countries,
including Armenia, Bulgaria, Estonia, Kazakhstan, Russia and Slovakia, that have reformed business
taxes (including payroll taxes and VAT) and in the process have increased tax revenues.6 If a
government finds that its health sector policy objectives cannot be achieved with the existing level of
funding, there is no reason why it should not consider altering the tax system to raise the necessary
additional resources. Hussain and Stern (2008) argue, for example, that China’s new policy goals in the
health sector will require an extra 3.8 percentage points of GDP in tax revenues, and argue that the
extra revenues could be achieved simply through higher rates of personal income tax, VAT, or
consumption and excise taxes. Unwillingness on the part of the finance ministry to channel more tax
revenues into the health sector (or to request additional donor assistance for the sector) may reflect a
view that the sector needs to increase its efficiency. In Nigeria, for example, the finance ministry

6
Measures adopted include: simplifying taxes, limiting incentives and exemptions, as well as reducing tax rates; such measures tend
to encourage tax compliance and also prevent pushing businesses into the informal economy.

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concluded that the efficiency of government spending and the quality of public services could be
increased by making improvements in the preparation and execution of the budget; the implementation
of these reforms was key to Nigeria’s successful debt negotiations, and subsequently resulted in
increased government spending on the health sector (Okonjo-Iweala and Osafo-Kwaako, 2007).
The validity of the idea that people may be willing to contribute to a SHI scheme because they can
secure better benefits depends on how far contributions actually translate into superior entitlements, the
likelihood of the contributor falling sick and needing to exercise his entitlements, and the extra costs
incurred by joining the contributory scheme. In Latin America, non-contributors are typically covered
by delivery systems operated by the health ministry, which are typically perceived as offering lower-
quality care than those providing care to those in the contributory scheme. To get the higher-quality
care, those in the contributory scheme have to pay not only the SHI contributions but also higher
copayments. In many countries (including many Europe and Central Asia and East Asia), the same
providers deliver care to those in the SHI scheme and those outside. In this case, the attraction of being
in the contributory scheme is that copayments are lower. In practice, however, in many countries in
Europe and Central Asia, there is weak monitoring at the point of use of whether patients have a SHI
card or not, and contributors and non-contributors may end up paying similar copayments as well as
receiving similar quality care. In both scenarios, but especially the second, the incentive to join the
contributory scheme is not overwhelming.
In addition, there is the possibility that people may join the scheme but not pay the full contribution
or any of it. Contribution evasion in SHI systems appears to be a serious issue, at least in the developing
world. In Colombia, evasion in the contributory regime (which covers formal sector workers as well as
informal workers not classified as poor) has been estimated to cost US$836 million in forgone revenues
(2.75% of GDP) (Escobar and Panopoulou, 2003). Nearly three-quarters of this was due to
underreporting, the rest being due to non-payment. In the Philippines, evasion also appears to be a
major issue, particularly among small shops and businesses, with one estimate suggesting that 70% of
those who should be contributing are not doing so (Jowett and Hsiao, 2007). Contrary to expectations,
the introduction of SHI schemes in eastern Europe and the former Soviet Union has not actually
resulted in additional revenues for health care, not least because of problems in collecting revenues. In
Kazakhstan, for example, only 40% of expected revenues were actually collected (Gottret and Schieber,
2006). In Russia, similar problems have been reported, with considerable variation geographically: the
Kemerovo region collects 75–78% of the money due to it, while in Moscow City the rate is even higher
(90%); by contrast, in the Volgograd region, only 508 of over 32 000 private enterprises apparently pay
into the insurance fund at all (Twigg, 1999). These problems are also evident in countries where
informal sector workers have the option of joining the SHI scheme. In the Philippines voluntary scheme,
where contributions by individual paying members are flat-rate, only 75% of revenues have actually
been collected (Obermann et al., 2006). In Mexico’s Seguro Popular program, where contributions are
linked to assessed income, only 8% of enrollees in the richest 60% of the population actually
contributed (all should have done so according to the rules), and those who did contributed on average
less than half of what they ought to have (Scott, 2006).
Evasion in contributions results in SHI revenues being lower than expected. In some cases the health
sector simply goes without the forgone revenues, and expenditures are reduced below planned
expenditures, often through late settlement of bills or health workers being paid late. In the medium
term, SHI contribution rates may be adjusted upwards, or the finance ministry may bail out the health
sector with subsidies to cover its deficit. Of course, evasion also exists in other taxes. But it seems at least
plausible that there are some taxes – indirect taxes, for example – where evasion is harder than it is in
SHI contributions.
As to the issue of volatility, SHI revenues sometimes do exhibit less year-to-year variation than
government spending on health (cf. e.g. Nonneman and van Doorslaer, 1994). But SHI systems are
not immune to financial crises that can occur in both downturns and upswings. Germany’s current

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health-care crisis has occurred partly because SHI revenues fell as unemployment rose (recall that the
contributions paid by Germany’s workers also pay for cover for the unemployed) and as the population
grew older. By contrast, Taiwan’s social insurance system experienced a financial crisis during a period
of rapid economic growth, because contributions were capped and contribution rates were not uprated
in line with growth of per capita income. Only after a fierce political debate were contributions increased
(Lu and Hsiao, 2003).
In any case, it is not clear that having resources flow automatically into a SHI fund is necessarily a
good thing, and that having a tax-financed budget being ‘vulnerable’ to the outcomes of government-
wide negotiations – the ‘whimsical nature of governments’ as two commentators (Nonneman and van
Doorslaer, 1994) put it – is necessarily a bad thing. The merit of the latter arrangement is that it permits
a more open debate about public spending tradeoffs between health and other sectors, and provides a
clear way for those managing government spending on health to be held accountable. Such debates tend
to happen less in a SHI system except insofar as the SHI agency has to appeal, as in Taiwan, for
modifications to contribution schedules to cover losses. Part of Germany’s concern, for example, is that
resources have continued to flow into SHI, and the costliness of care has risen accordingly, so much so
that Germany’s share of GDP devoted to health care is third highest in the OECD. Had the Germans
had a continuous political debate about the tradeoffs between health and other sectors, they might have
made ended up devoting a smaller share of GDP to health. In the Philippines, the SHI agency started
facing tough questioning from Congress on its financial plans only after its tax-financed indigent
program was introduced.

3.2. Income distribution implications

The choice between SHI and tax finance also has implications for the distribution of after-tax income.
SHI contributions are often regressive – at least where SHI covers a sizeable share of the population –
because of contribution ceilings; by contrast, general revenues are typically proportional if not
progressive (Wagstaff et al., 1992; Wagstaff et al., 1999; O’Donnell et al., 2008). In a low-income setting,
where poorer households grow much of their own food, and luxury goods are taxed at higher rates,
indirect taxes often emerge as progressive. In 11 of 13 Asian economies they studied, O’Donnell et al.
(2008) found indirect taxes to be progressive, including in the three advanced economies of Hong Kong,
Korea and Taiwan. Direct taxes are typically even more progressive, not least because they are often
paid largely by those in the formal sector.
It is not just progressivity – or vertical equity – that matters: horizontal equity matters too. In a SHI
system, it is common for people in different schemes to end up paying different amounts for essentially
the same benefit package, because they are locked into specific schemes for reasons of occupation or
geography, and the government’s equalization scheme does not achieve full (horizontal) equality (van
Doorslaer et al., 1999; Wagstaff, 2007). Horizontal inequity also arises in other taxes, but on the whole
horizontal inequity appears to be higher in the case of SHI than in the case in the case of general
revenues (van Doorslaer et al., 1999).

3.3. SHI, unemployment and the informalization of the economy

The choice between SHI and tax finance has implications too for unemployment and the size of the
formal sector. It is the perceived negative impact of SHI on employment, in fact, that has dominated the
recent health reform debate in the oldest of SHI countries – Germany. The German health minister
described the exclusive linking of health finance to earnings rather than income more generally as ‘the
Achilles heel’ of the German’s social insurance system (Schmidt, 2006).
The idea that a heavy emphasis on payroll taxes in financing of health care has negative consequences
for employment is consistent with the OECD’s recommendations to its members to lower payroll taxes
(OECD, 1999). It is not, however, uncontroversial, in part because people may perceive a link between

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payroll taxes and an entitlement to benefits that may be absent with other taxes (Summers, 1989), and in
part because all taxes have some disincentive effects on employment. In his review of the evidence,
Nickell (1997) concluded: ‘Broadly speaking, the key tax rate for the labor market is the sum of the
payroll tax rate, the personal income tax rate and the consumption tax rate. Switching between these
taxes will not have an important impact, so payroll taxes, per se, are of little consequence.’ (p. 68). This
leaves open the possibility of course that switching from these taxes to other forms of government
revenue, such as import duties, may have an impact on employment.
Even if the choice between SHI and tax finance were to matter little for employment, it is possible
that it may make a difference to the split between formal and informal employment. This issue has
received attention in Latin America as well as in Europe (Belev, 2003; Baeza and Packard, 2006; Datta,
2006). The incentive is likely to be especially large in the case where enrollment in the SHI scheme is
voluntary or only weakly enforced among informal sector workers, so that people may opt for informal
employment arrangements and run the risk of facing a higher (though subsidized) price in the health
ministry’s public system or are required to (or may) take out private insurance. In countries where
informal workers pay a flat-rate contribution (Vietnam for example), or where contributions are
supposed to be linked to income but in practice may only be weakly linked (Mexico’s Seguro Popular
scheme, for example), some workers will find that by opting for informal employment arrangements
they can keep their insurance coverage (albeit possibly with somewhat less generous coverage) and pay a
substantially lower contribution. In Germany, the self-employed are required to take out private
insurance or join the SHI scheme, but typically elect for the former, because the private insurance is
often cheaper than SHI, especially for people who do not have dependents and who take out private
insurance when they are young (once insured, the premium remains that set for the person’s age cohort
when the person joined – they rise only according to increases in overall health-care costs). These
incentives become even more of an issue if being in formal employment means being drawn into the tax
system and having to contribute to a pension scheme that because of limited life expectancy may only
pay out for a few years if any. SHI thus contributes potentially to growing informality of the economy,
with all the negative connotations, including a reduction in the government’s ability to raise taxes. This
is one of the reasons why a recent book on health systems in Latin America recommended a gradual
move from payroll financing to general revenue financing (Baeza and Packard, 2006).

4. POOLING AND RISK PROTECTION

Whether financing health spending through SHI contributions or general revenues, the aim is to pool
contributions across a large group so that the risk of medical expenses is spread across the group rather
than being borne by each individual in isolation. The most obvious difference between SHI and tax
financing is that the latter spreads risk across the entire population while the former does not necessarily
do so. In SHI systems, some groups may have SHI coverage and others may not, and there is no
assurance that all those covered by SHI have the same coverage.

4.1. The elusiveness of universal coverage under SHI

The traditional concept of SHI is that wage-earners make mandatory contributions based on their
wages. But in the developing world today, a large – and increasing (Gottret and Schieber, 2006) –
fraction of the population (often the majority) is not employed in the formal sector. One key question
from the point of view of risk protection is: What arrangements are made for these people? There is
another important albeit often overlooked question, however, namely: How far do formal sector
workers – who are typically required to join the SHI scheme – actually do so?
It is often assumed that coverage rates among formal sector workers for whom enrollment is
mandatory is 100%. In reality, rates appear to be below this, though the data on the subject are patchy.

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In urban China, only 24% of private sector employees and 50% of state-owned enterprise employees
are enrolled in the new urban health insurance scheme (Chen et al., 2004; Wu et al., 2004). In Vietnam,
around 60% of formal sector workers appear to be enrolled, according to estimates computed by the
author from the 2006 Vietnam Household and Living Standards Survey (VHLSS). In the Volgograd
region of Russia, only 508 of over 32 000 private enterprises apparently pay into the insurance fund
(Twigg, 1999). In Albania, according to computed by the author from the 2005 Living Standards
Measurement Survey data, the SHI coverage rate among people who reported having worked for
someone else during the week prior to the survey is only 50%. In the Philippines, coverage among the
formal private sector has been estimated at 75% (Jowett and Hsiao, 2007).
Coverage rates among those outside the formal sector (which can include the dependents of formal
sector workers in some countries) tend to be a good deal lower. The arrangements for this group vary
from country to country. In some countries, those with sufficient means are required to join the SHI
scheme with contributions based on income as reported in tax returns (e.g. Korea), or being assessed on
the basis of a proxy means test (e.g. Colombia). In other countries, those with sufficient means have the
option of joining the national SHI program (e.g. the Philippines, Vietnam) or a separate program (e.g.
Mexico’s Seguro Popular program). Many countries enroll those without sufficient means at the
taxpayer’s expense (e.g. Colombia, the Philippines, Vietnam). There are some countries, where those not
required to join the mandatory SHI program are automatically covered by a program run by the health
ministry (this is true of many Latin American countries).
Even where enrollment is compulsory among the informal sector, enrollment rates can be low. In
Colombia, enrollment among informal sector workers deemed to have sufficient means to be in the
contributory regime is low – one estimate puts enrollment at just 14% (Restrepo et al., 2007). This is
comparable to the enrollment rates in some countries where enrollment by informal sector workers is
voluntary. In the Philippines, only 14% of those in the informal sector deemed able to pay the premium
is voluntarily enrolled with the scheme, 10 years after its inception (Jowett, 2006). In Vietnam, where
enrollment is voluntary, only 15% or so of adults eligible for voluntary membership of the SHI scheme
have joined according to estimates by the author based on the 2006 VHLSS. In Ghana, 1 year after the
scheme’s start, enrollment stood at 21% of the population, but only 5 percentage points of the 21
represented enrollment by contributing informal sector workers (Atim, 2006). One developing country
that has succeeded – at least for the moment – where others so far have failed is China, where
enrollment in its new subsidized and voluntary rural health insurance scheme is around 80% in pilot
counties (Wagstaff et al., 2009). However, such high enrollment rates appear to have been the result of
pressure being exerted by local government officials eager to hit their enrollment targets; some have
been so keen in fact that they have waived the household’s contribution and have financed it out of local
government revenues. And coverage is so shallow that insured households still pay the vast majority of
health-care costs out-of-pocket. The sustainability of such an approach even in China seems
questionable, and it is one that is ill suited to most other developing countries.
Where people are enrolling in SHI schemes, there is some evidence that it is the worst risks that are
enrolling. Such adverse selection appears to exist in the Philippines, for example, and is argued to pose
challenges for the financial sustainability of the program (Jowett, 2006). It appears to be present in
China’s rural scheme (Wagstaff et al., 2009). In Vietnam, the voluntary scheme was suspended for a
time in 2006–2007 because of the threat to the scheme’s financial sustainability posed by adverse
selection; people were waiting until they got sick before enrolling, there being no waiting period in the
scheme before benefits could be obtained and no limits on preexisting conditions. It would, in fact, be
surprising if adverse selection were not a problem in all schemes that are voluntary in nature if not in
name, given the evidence on the subject from the around the world.
Covering the poor by paying their contribution through general revenues has proved easier than
persuading the informal sector to enroll, though most programs commit errors of exclusion, largely
because poor households fail to apply. In Colombia in 2003 (10 years after the reform), less than 50% of

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the principal target group (households in categories 1 and 2 of the ‘SISBEN’ means-testing instrument)
is actually enrolled in the non-contributory scheme (Gaviria et al., 2006). In Vietnam, about 40% of
those who ought to have received health insurance coverage (or a free health-care card) by virtue of
being poor actually had done so in 2004 (Wagstaff, 2009). Errors of inclusion are also common. In
Colombia, over one-quarter of households in SISBEN category 4 are enrolled in the non-contributory
(subsidized) program but ought not to be covered under the rules (only categories 1 and 2 are
universally covered; some municipalities also cover some households in SISBEN category 3) (Gaviria
et al., 2006). In Mexico, only 43% of those covered at the taxpayer’s expense in Seguro Popular7 are
actually in the poorest 20% of the population – the official cut-off point (Scott, 2006).
The difficulties that developing countries today are experiencing in achieving coverage among all
population groups point toward a long and frustrating road to universal coverage under SHI. The
European SHI countries studied by Carrin and James (2004) (Austria, Belgium, Germany and
Luxembourg) took close to 100 years to achieve universal health insurance (UHI). Costa Rica, Japan
and Korea, which achieved UHI in 1991, 1958 and 1989, respectively took considerably less time,
though Costa Rica’s coverage rate in 1991 was still only 85%, and Japan and Korea were both at an
advanced stage of economic development when they reached UHI (Japan’s per capita income was $7876
in 1961 in 2000 prices, while Korea’s was $6133 in 1989) (Carrin and James, 2004; Wagstaff, 2007). In
the early 1980s, when Korea was extending coverage to the informal sector, it experienced similar
problems collecting contributions to those being experienced now by developing countries: the health
insurance societies had difficulty in identifying the income level of informal sector workers, collecting
the payment and determining the number of family members (there was an incentive for people to
declare others as family members to receive benefits without paying); they also faced the problem that
some households were genuinely unable to pay their contributions (Anderson, 1989). Even today, the
Korean government subsidizes about half of the contribution of the self-employed. In Japan, the role of
tax finance is even larger: nearly 20% of total health spending compared with Korea’s 10% (O’Donnell
et al., 2008).
Clearly, the chances of SHI leading to universal coverage in economies containing large numbers of
informal sector workers are slim: the bigger the informal sector, the bigger the likely coverage gap. In
such economies, SHI would not seem an especially promising route to achieving universal coverage,
whether for a package that contains just ‘basic’ cost-effective interventions, or for one that contains
these plus a few ‘catastrophic’ interventions. This conclusion helps explain why Thailand, which is
strongly committed to UHI, relies on payroll contributions for only 12% of its population (civil
servants and those working in private businesses), and covers most of the rest of the population through
taxation.8 It also explains why China appears to be on the verge of using tax revenues to finance a
universal package of ‘basic’ services.

4.2. The merits and demerits of multiple insurers/purchasers

On the face of it, another difference between SHI systems and tax-financed systems is that under a tax-
financed system there is just one risk pool, while under a SHI system there may be multiple risk pools.
While there may be some merits to having a single risk pool (economies of scale, monopsony in
purchasing, the absence of inequalities in benefit packages, etc.), a SHI advocate might argue that there
are some merits to having multiple pools.

7
Seguro Popular is the health ministry’s semi-SHI scheme that operates in parallel to the social security institute’s SHI scheme, and
is aimed at the informal sector. The poorest two deciles are exempt from contributions. The remainder of the population
contributes according to assessed income.
8
In 2002, the government increased coverage from 80–96% by introducing a tax-financed scheme with a small (30 baht) copayment
for those previously uncovered (13% of the population), and all those previously covered at the taxpayer’s expense apart from
current and retired civil servants and their dependents (61% of the population).

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512 A. WAGSTAFF

In some countries multiple schemes exist, but do not compete with one another. Rather people end
up being assigned to one or other scheme depending on their occupation or place of residence. This is
the case in countries like Colombia (those with sufficient means join the contributory program, those
without join the subsidized program), Japan (different cities operate different schemes), Thailand (civil
servants join one scheme, formal-sector workers join another, and the rest are covered by the taxpayer)
and Mexico (formal-sector workers join the social security scheme, and others have the option of
joining the Seguro Popular scheme). In such a setting, contribution rates are fixed by law, and the risk
profile and per capita revenue depend on the profile of the scheme’s members. It is highly likely in this
scenario that the benefit package would differ across schemes, with low-income high-risk schemes being
unable to offer a very generous package, and high-income low-risk schemes being able to offer a more
generous package. One way round this is for there to be some equalizing transfers ex post (i.e. after the
costs of the scheme have become apparent) from the high-income low-risk schemes to the low-income
high-risk schemes. In practice, these transfers are typically not wholly equalizing, however, and
differences in contribution rates and/or differences in benefit packages are observed. In Germany,
before insurers were allowed to compete with one another, sizeable differences in contribution rates
were evident (Docteur and Oxley, 2003). In other countries, the outcome involves differences in benefit
packages. Colombia’s subsidized regime, for example, spends on average just 40% of the amount spent
per capita by the compulsory regime. Chile’s scheme for those who opt for public sector cover (the
FONASA program) spends on average 60% of the amount spent per capita by the program for those
opting to be covered by a private insurer. Mexico’s Seguro Popular program spends on average 50% of
that spent by the scheme for formal sector workers. Thailand’s new tax-financed scheme has a less
generous benefit package than the pre-existing schemes for civil servants and formal-sector workers
(Towse et al., 2004).
One reason why such a situation persists is political economy. The civil servants and formal-sector
workers in Thailand, for example, resisted attempts to reduce their coverage under a proposed universal
scheme (Towse et al., 2004). But different schemes may also be necessary in a SHI system because of
labor market incentives. If the schemes had the same benefit package, formal sector workers would have
an incentive to leave the formal sector and obtain the same cover through the cheaper informal sector
scheme. This provides a rationale for multiple non-competing schemes having different levels of cover,
but it does not help make the case for SHI over tax-financed health systems.
Where a multiple-scheme SHI system might have a potential advantage over a tax-financed system is
that it could allow for competition in the financing of health care. Insurance schemes could compete
with one another, by charging different premiums or contribution rates, or offering different benefit
packages. Argentina, Belgium, Chile, the Czech Republic, Germany, the Netherlands, Slovakia and
Switzerland are all examples of countries where health insurers compete with one another. Hungary and
Poland are considering allowing insurer competition within their SHI systems.
On the face of it, such competition could be potentially beneficial, encouraging insurers to reduce
their administrative costs and to negotiate with providers a better quality care at a lower cost. In
practice, the benefits of allowing competition between insurers appear to have been muted. In some
countries administrative costs have been driven down, but sometimes through the merger of schemes
(i.e. reduced competition), allowing economies of scale to be achieved. Risk-selection is also an
unresolved issue (van de Ven et al., 2007). One way that insurers can reduce their costs (and hence
contribution rates or premiums) in a competitive insurance system is to select low-risk individuals. To
prevent risk-selection being the means by which insurers reduce costs, countries have devised risk-
adjustment formulas that are used in ex ante risk-equalization transfers: schemes either receive money
or have money taken from them depending on how their revenues compare to the costs they are
expected to incur on the basis of the demographic and other characteristics of their enrollees. The
problem is that even the best risk-adjustment formulas predict only a small fraction of cost variations,
so that within each risk category, insurers have an incentive to select the best risks. This results in higher

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 SOCIAL HEALTH INSURANCE 513

premiums among the worse risks, and may lead to some schemes ending up in financial difficulty.
Concerned about these possibilities, some governments (Belgium is an example) have resorted to
supplementing ex ante transfers with ex post transfers based on actual expenditures. The effect of this of
course is to blunt an insurer’s incentives to search for cheaper care from providers.
It is also worth noting that if competition between purchasers is desired, it can be accomplished in a
tax-financed health-care system. New Zealand and the UK have done so by having primary-care
physician practices act as purchasers for some types of hospital care. They receive a risk-adjusted
capitation payment from the health ministry’s budget for each patient they enroll, and at least in the
early days of the UK reforms were encouraged to compete with one another for enrollees. Physician
practices assume a considerable amount of financial risk, and are in effect insurer–purchasers, albeit
financed out of general government revenues.

5. SHI AND HEALTH CARE PURCHASING AND PROVISION

The final way that the choice between SHI and tax financing can make a difference is in the
arrangements for the purchasing and provision of health care. It is increasingly argued (cf. e.g. World
Health Organization, 2000) that purchasing of health care ought to be ‘strategic’ and ‘active’, that the
third-party payer should not passively purchase services by allowing providers to deliver whatever
services they choose to deliver and paying them via a budget, but rather should determine what services
to purchase, choose which providers to deliver them through a selective contracting approach, and pay
them in a way that incentivizes them to treat more patients, be cost-conscious, and deliver high-quality
care. This approach, it is argued, calls for an institutional separation of purchasing and provision,
rather than a system where the functions are integrated in one organization. SHI advocates argue that
SHI is institutionally preferable to a tax-financed system, because SHI systems typically have such an
institutional separation of functions, or at least a SHI system lends itself better to such an institutional
separation. The typical tax-financed system, by contrast, involves a ministry of health delivering health
care through its own network of facilities, which are paid through a mixture of budgets and salaries,
whose degree of autonomy is severely limited, and whose incentives to contain costs and delivery high-
quality care are minimal.
On paper at least, the purchaser–provider split approach has much to commend it compared with a
public-integrated system where the purchasing and provision functions are integrated within one
organization. It holds the promise of a purchaser developing a strong information system covering
costs, quality and health needs, which can be used to steer resources to where they are needed most and
will have the biggest impact. And it is true that many SHI systems do operate such a split, and many
tax-financed systems do not.
Two points are worth making, however. First, the empirical evidence on the merits of
purchaser–provider split is thin. The administrative costs of introducing and operating such a system
are likely to be high, and higher administrative costs may outweigh any cost-savings brought about by
having a strategic purchaser putting downward pressure on the costs of delivering health services.
Furthermore, purchasing in practice is not always very strategic and the contracting not always
selective. Only recently, for example, have the European and central Asian countries that adopted SHI
during the 1990s begun strategic purchasing and selective contracting, and even now contracting by the
SHI agency with private hospitals is relatively rare in the region.9 SHI agencies often simply reimbursed
whichever public hospitals their members used, paying them on a fee-for-service basis, though this is
now changing in many countries. Where SHI agencies have contracted selectively, the arrangements

9
See, for example, the Health in Transition series of country studies undertaken by the European Observatory on Health Systems
and Policies at http://www.euro.who.int/observatory/Hits/TopPage.

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514 A. WAGSTAFF

chosen have not always been to the advantage of enrollees. A World Bank report in the late 1990s on
health insurance in Argentina (World Bank, 1997) argued that ‘it is acknowledged by Argentines that
personal connections and corrupt practices, instead of quality and economy, weigh heavily in the award
of capitated contracts and other payments to medical providers and suppliers, and this adds
substantially to the inefficiency and high cost of health care in Argentina’ (p. 7). Overall, there is, in fact,
no firm evidence that public-integrated health-care systems do worse than public-contract systems. In
fact, the available econometric evidence from the OECD suggests that at least as far as health
expenditures per capita are concerned, the two types of system perform similarly (Docteur and Oxley,
2003).
The second point worth making is that while it is true that many SHI systems are public contract
models, and many tax-financed systems are public-integrated systems, the correspondence is by no
means one-to-one. Canada is largely tax-financed but the provision of care and the purchasing of care
are undertaken by different organizations. The same has been true of the UK since the mid-1990s, and
of New Zealand as well, though the latter has moved closer to an integrated model following reforms in
2000 (Docteur and Oxley, 2003). Latvia even has a SHI agency that is actually financed out of general
revenues, not payroll taxes (Langenbrunner et al., 2008). Examples of SHI systems where the
purchasing and provision functions are integrated also exist. Mexico’s SHI scheme for formal-sector
workers has its own network of providers, and Chile’s SHI scheme for those who choose not to opt for
private cover (the FONASA program) delivers care largely through the health ministry’s network of
public facilities. The key point is that the source of revenues (earnings-related contributions or general
revenues) has no bearing whatsoever on the question of whether the purchasing and provision functions
are integrated within the same organization: if a purchaser–provider split is wanted, it can be
accomplished just as easily in a tax-financed health system as in a SHI system.

6. CONCLUSIONS
By influencing the collection of revenues, the pooling of revenues, and the purchasing of provision of
health care, the choice between a SHI-financed health system and a tax-financed health system can
affect the ability of a government to achieve the most basic goal of any health system: to get health care
to those who need it and thereby improve population health. But the choice can also affect the
government’s ability to reach other goals, through its impact on employment, the size of the formal
sector and the distribution of income.
As far as revenue collection is concerned, SHI systems do not have a larger tax base, and introducing
SHI may reduce resources available for health care if the finance ministry reduces its allocation of tax
revenues to the health sector in line with theoretical SHI revenues. The incentives to contribute in many
SHI systems are weak, reflected in high rates of non-enrollment and evasion in contributions. Unlike
general revenues, SHI tends to be regressive, and while the implications of the choice between the two
for employment levels is not as clear-cut as is often claimed, it does seem clear that SHI financing may
contribute to the informalization of the economy. As far as risk-pooling is concerned, SHI systems
typically take decades to achieve universal coverage. Even among formal-sector workers, coverage rates
are often below 100%. Among other groups, coverage rates are even lower, often very low. Efforts to
cover the poor through tax-financed contributions have often been quite successful, though errors of
inclusion and exclusion are evident. SHI systems, unlike tax-financed systems, often have multiple risk
pools. Where people are assigned to one scheme or another on the basis of their employment or place of
residence, this typically results in different benefit packages, and sometimes different contribution rates
as well, even after the operation of ex post risk-equalization schemes. It is sometimes claimed that a
virtue of SHI is that it allows competition between insurance schemes, which will put downward
pressure on administrative and health-care costs. In practice, it seems that cost reductions by individual

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 SOCIAL HEALTH INSURANCE 515

schemes are achieved largely through risk-selection, which even the most sophisticated ex ante risk-
equalization schemes are unable to prevent. Finally, as far as the purchasing and provision of health
care is concerned, a purchaser–provider split and strategic purchasing can just as easily be achieved
under a tax-financed system as under a SHI system.
SHI is thus far from the panacea it is often portrayed to be. Tax-financing is, of course, not without
its problems. One area where it is vulnerable is the homogeneity of care: it fails to provide a mechanism
for responding to the demands by the better off for more sophisticated health care or better amenities,
and forces everyone down to the same standard. One way – and a bad way – of responding to this
challenge is to allow the better off and the politically connected access to expensive care at the tax-
payer’s expense in facilities that are inaccessible to the bulk of the rest of the population (i.e. urban
hospitals). This happens in Africa and probably explains the pro-rich government spending
distributions there (Castro-Leal et al., 2000). It also happens in some of the Former Soviet Union
countries. This approach almost certainly entails a far higher rate of ‘leakage’ of government funds to
the non-poor than is required to retain their political support for a tax-financed system. An arguably
better model is one where providers receive payments from government that keep in check the
sophistication of health care and the amenities of the facilities in which it is delivered, and forces the
better off who want to obtain more sophisticated care or better amenities into the private sector.
Inequalities in use of services will still be evident, but they will be lower than they would otherwise have
been. This is basically the model operated by countries like Brazil, Britain, Ireland, Malaysia, Sri Lanka
and Sweden, where the private sector operates as a limited safety valve.
There are, of course, other challenges that tax-financed systems face, including the challenge of
introducing a purchaser–provider split and giving providers an appropriate degree of autonomy. But
these are not insuperable. And a tax-financed system has the three great merits of not leaving a large
portion of the population with inferior insurance coverage while the health system staggers slowly down
the long road to universal coverage, of avoiding many of the labor market distortions associated with
payroll financing, and of raising revenues in an equitable fashion. These are important plusses, the first
especially so for developing and transition economies. But as recent developments in the old SHI
countries show, they remain important considerations even at advanced stages of economic
development.

ACKNOWLEDGEMENTS

Without wishing to incriminate them in any way, I should like to thank Emmanuel Jimenez, three
anonymous referees, Jan Bultman, Pablo Gottret, Matthew Jowett, Jack Langenbrunner and Magnus
Lindelow for helpful comments on earlier versions of this paper. The findings, interpretations and
conclusions expressed in this paper are entirely those of the author, and do not necessarily represent the
views of the World Bank, its Executive Directors, or the countries they represent.

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